Blockworks Research: As Ethereum recovers, what opportunities and challenges will Based Rollup bring?

Original author: Donovan Choy

Original translation: TechFlow

Ethereum loves Rollup. Recently, "based" Rollup has attracted much attention.

What is special about based Rollup? The core lies in its sequencer.

Traditional Layer-2 uses a centralized sequencer to process user transactions and submit them to Layer-1 for settlement, while based Rollup entrusts the sequencing task to the validators of Ethereum Layer-1. This mechanism is called "based sequencing".

This design has two major advantages: anti-censorship and enhanced interoperability.

By letting Layer-1 act as a sorter, Rollup based on Ethereum can provide the same liveness guarantees as the Ethereum mainnet while avoiding the censorship issues that may arise from a centralized sorter.

Read more: MagicBlock Open Sources a16z-supported "Short-lived Rollup" technology

Another important advantage is a significant increase in interoperability. Based Rollup supporters (such as Justin Drake) call it "synchronous composability", that is, transactions on Ethereum can be synchronously ordered or bridged between different Layer-2.

In simple terms, smart contracts on based Rollup can call other contracts on Layer-1 almost instantly in the same block, just as if they were on the same chain.

This idea of synchronicity and “money legos” is not new; it has always been an important part of Ethereum’s original vision.

Read more: Rethinking Ethereum Consensus with Beam Chain

However, the current decentralized state of Rollups causes transactions between Arbitrum and Optimism to be asynchronous, which introduces fee uncertainty. This uncertainty is further exacerbated by the fact that gas fees are calculated at different points in time, rather than uniformly within the 12-second time slot of an Ethereum block.

In addition to making Ethereum more interoperable, this mechanism also brings significant cost savings. Ahmad Mazen Bitar, technical lead at Nethermind, explained:

“Users can initiate a transaction on Layer-1, use the deep liquidity pool of Layer-2 to complete the operation, and then return to Layer-1. This synchronous composability makes the whole process more efficient.”

Currently, the largest based Rollup is Taiko, which has seen significant growth in both TVL and daily transaction volume this month.

Source: DefiLlama

Other early based Rollup projects are also under development, such as the Nethermind team's Surge and the Puffer Finance team's UniFi. These projects are all based on the Taiko fork.

Nevertheless, based Rollup also faces some challenges. Since the sorting task is handed over to the Layer-1 validator, its performance is limited by the 12-second block time of Layer-1.

Therefore, the advantages of based Rollup, such as synchronous composability, may be difficult to fully realize in practice. It requires real-time zero-knowledge proofs to be completed within a 12-second time slot, otherwise composable transactions cannot be executed quickly.

To this end, Taiko introduced a variety of technologies, including zk proofs from Risc Zero and Succinct Labs, and a trusted execution environment (TEE) based on Intel SGX. This makes Taiko the first based Rollup to implement multiple proofs in a production environment without relying on a single trusted party.

“The performance of provers is improving rapidly. We see more trusted execution environments (TEEs), more efficient and lower-cost zero-knowledge virtual machines (zkVMs), and verifiable state machines (AVSs) being introduced for use. We believe that zk technology is progressing very smoothly, and the goal of generating proofs within sub-time slot delays is not far away,” said Brecht Devos, co-founder of Taiko, in an interview with Blockworks.

However, blockchain-based Rollup also faces some challenges. For example, due to the lack of a centralized sorter, an important source of income, MEV (maximum extractable value), may be lost. However, Devos said that this problem can be solved in some innovative ways.

In the Taiko network, “MEV can be captured by auctioning ‘execution tickets’ to Layer-1 block proposers,” Devos explained to Blockworks.

So while based Rollups give sorting rights to Layer-1 validators by default, this is not the only solution.

Matthew Edelen, co-founder of Spire Labs, a company focused on Rollup infrastructure, shared a similar sentiment in a recent Bell Curve podcast: "Auctions are not the only way to allocate sorting rights. We can allocate 99% of sorting rights through auctions, while allocating the remaining 1% to friends or independent stakers to present a better image on L2Beat."

In the long run, MEV (maximum extractable value) may not be a major problem. This view stems from a simple cost-benefit analysis: currently, most of the blockchain's revenue comes from congestion fees, which far exceeds MEV revenue. Moreover, as more efficient MEV solutions continue to emerge, the proportion of MEV revenue is gradually decreasing.

Therefore, for Rollup, a better revenue model is to rely on the network effects brought by synchronous composability and benefit from congestion fees rather than relying on MEV charges.

As Justin Drake said in The Rollup podcast:

“Right now, the ratio of congestion fees to contention fees is about 80:20. Of the revenue on Ethereum mainnet (Layer-1), 80% comes from congestion fees - about 3,200 ETH per day since the implementation of EIP-1559. Since the merger, MEV revenue has been about 800 ETH per day. I think this ratio will become more disparate, perhaps from 80:20 to 99:1.”

To sum up, the advantages of Based Rollup bring Ethereum’s user experience back to its original state.

Interestingly, this return is actually reminiscent of the characteristics that blockchain has had since its inception. Synchronous composability and transaction ordering capabilities at the Layer-1 level have been core features of blockchains since the birth of the Bitcoin network.

This divergence of execution layer responsibilities is largely due to the centralized development path of Rollups in recent years (as well as the multi-chain architectures of Polkadot, Cosmos, and Avalanche). Today, Rollup-based solutions are ready to recapture this original intention.

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